Hayek on Closed Shops and Yellow Dogs

Charles Baird is a professor of economics and the director of the Smith Center for Private Enterprise Studies at California State University at East Bay .

In my December 2006 column I discussed some of Hayek’s classical-liberal views on the rule of law and labor unions. In brief, Hayek approved of voluntary unionism based on a correct understanding of freedom of association and the rule of law, and he fittingly condemned most features of unionism as we know it in the United States under the National Labor Relations Act (NLRA). In this column I argue that Hayek’s views on closed shops and so-called “yellow-dog” contracts are themselves inconsistent with freedom of association and the rule of law.

A closed shop is an agreement between an employer and a labor union that excludes union-free workers from initial and continued employment. A yellow-dog contract is an agreement between an employer and an employee that, as a condition of initial and continued employment, the employee must be and remain union-free. The NLRA outlaws yellow-dog (union-free) contracts and promotes modified closed (union-only) shops called “union shops.” These are places in which a worker does not have to be a union member to be hired, but, as a condition of continued employment, must become a union member after a probation usually of 30 days.

In Chapter 18 of The Constitution of Liberty (1960) Hayek argued that the closed shop, as it emerged under the illicit privileges and immunities granted to unions by the Trades Disputes Act in Britain and the NLRA, is coercive and an affront to the rule of law and freedom of association. He called for the abolition of those privileges and immunities, and predicted that most forms of union coercion would then soon disappear.

I agree, but then he wrote: “[T]he unions should not be permitted to keep non-members out of any employment. This means that closed- and union-shop contracts . . . must be treated as contracts in restraint of trade and denied the protection of the law. They differ in no respect from the ‘yellow-dog contract’ which prohibits the individual worker from joining a union and which is commonly prohibited by the law.”

Here Hayek contradicts himself. In the absence of any special privileges or immunities for unions or employers, the principle of freedom of contract (which is part of the freedom of association) implies that a willing employer has a right to agree with a willing union composed of voluntary members to set up a union-only shop. I wouldn’t expect many employers to make that choice, but they should not be prohibited from doing so. If such agreements work in a free-market setting, they will be adopted by other employers and other unions. If they don’t work, they will not be adopted. The market will sort it all out. Hayek endorses the principle of letting the market sort things out in other settings. He is not logically consistent when he advocates government interference in market arrangements in this setting.

Similarly, union-free contracts should not be prohibited. A job offer made by an employer to an employee has several components. The compensation package stipulates a wage or salary along with a set of other benefits of various descriptions. The classical-liberal view is that an employer has a right to offer any compensation package he chooses and that the prospective employee has the right to accept or reject the offer. The job description itself (the stipulation of the time, place, and manner of the employee’s expected actions on the job) is another part of the job offer. The classical-liberal view is that an employer should be able to make such stipulations and that the prospective employee should be free to accept or reject the offer on the basis of those stipulations. It follows that an employer has a right to stipulate a union-free work environment in his job offer, and a prospective employee has a corresponding right to accept or reject the job offer. Any job offer will consist of some things a prospective employee likes and other things he doesn’t like. He will settle the tradeoffs in his own mind before he decides to accept or reject the offer.

Hayek claimed that his favoring prohibition of union-only and union-free contracts is consistent with the principle of freedom of contract correctly understood:

It would not be a valid objection to maintain that any legislation making certain types of contracts invalid would be contrary to the principle of freedom of contract. We have seen before (in chap. xv) that this principle can never mean that all contracts will be legally binding and enforcible [sic]. It means merely that all contracts must be judged according to the same general rules and that no authority should be given discretionary power to allow or disallow particular contracts. Among the contracts to which the law ought to deny validity are contracts in restraint of trade. Closed- and union-shop contracts fall clearly into this category.

However, the “general rules” by which all contracts ought to be judged are the rules of voluntary exchange. Hayek usually argued that contracts are legitimate if they emerge out of mutual consent in the absence of force or fraud and if they do not trespass against the just entitlements of third parties. In Chapter 15 he included “contracts in restraint of trade” along with “contracts for criminal purposes” in his list of contracts that government should not enforce, but he gives no convincing explanation for doing so. If “restraint” means excluding others from the competitive market process, then contracts in restraint of trade are not legitimate and should not be enforced. But in a free-market setting, union-only and union-free contracts are not like that. No employee, whether union-free or not, has a right to work for any employer who is not willing to hire him.

Mischievous Role

The term “contracts in restraint of trade” means different things to different people. In particular it has played a mischievous role in the sad history of antitrust regulations. One person’s contract in restraint of trade is another’s innovative arrangement to cope with market realities. As Dominick Armentano has shown, American antitrust laws have more often been used to protect particular competitors than to protect the process of competition and consumers. I infer from Hayek’s condemnation of contracts in restraint of trade in the context of unions that he would support the application of antitrust legislation to them. In my view antitrust legislation should apply neither to unions nor to enterprises. It should be abolished. As long as every union and every enterprise plays by the rules of voluntary exchange, the market process will sort out efficient from inefficient organizational architectures in all markets, including labor markets.

However, the NLRA exempts unions from the rules of voluntary exchange. It grants unions several monopoly privileges that they are free to use to exploit workers, consumers, and employers. Until the NLRA is repealed, it may be useful to apply some antitrust restrictions to labor unions. But that is second best. The classical-liberal solution is to repeal both the NLRA and antitrust legislation and let freedom of contract reign.